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EXCO Resources (NYSE:XCO)

Q1 2011 Earnings Call

May 04, 2011 10:00 am ET

Executives

Stephen Smith - Vice Chairman, President and Chief Financial Officer

Douglas Miller - Chairman of the Board, Chief Executive Officer, Chairman of EXCO Holdings, Chief Executive Officer of EXCO Holdings

J. Douglas Ramsey - Vice President, Chief Financial Officer, Chief Accounting Officer and Treasurer

Paul Rudnicki - Vice President of Financial Planning & Analysis

Harold Hickey - Chief Operating Officer and Vice President

Analysts

David Heikkinen - Tudor, Pickering, Holt & Co. Securities, Inc.

Sachin Shah - ICAP

Alex Heidbreder - Millennium Management

Gary Stromberg - Barclays Capital

Question-and-Answer Session

Sachin Shah - ICAP

That's $20 a share?

Douglas Miller

Yes.

Sachin Shah - ICAP

Okay. The other question I wanted to ask is since you made the offer back early November of last year, nat [natural] gas has traded almost $1 higher. So any comment that you can maybe offer on that?

Douglas Miller

Yes, I would think -- here's the thing. What's your name again?

Sachin Shah - ICAP

Sachin.

Douglas Miller

Sachin. Sachin, I think if you'll go back and look correctly, you'll see that nat gas was pretty close to where it is today and then it fell and now it's back up. So I think you're probably wrong on that.

Sachin Shah - ICAP

Okay.

Douglas Miller

But I'll be happy to provide the data for you if you like it.

Sachin Shah - ICAP

Okay. Fair enough. Can you offer any comment in relation to the fact that the stock is trading above your offer?

Douglas Miller

That one I have a problem with.

Sachin Shah - ICAP

Okay. Fair enough.

Operator

Your next question comes from the line of Alex Heidbreder, Millennium.

Alex Heidbreder - Millennium Management

Can you give us the debt level at the April 28 update at TGGT?

Douglas Miller

TGGT debt level.

Paul Rudnicki

Three and change.

Douglas Miller

Paul is looking it up right now. They don't have it yet. Do you have another question? If they don't have it by the second question, it's over with.

Alex Heidbreder - Millennium Management

The April acreage deal, were there any reserves in production associated with that?

Douglas Miller

Very little. We had drilled some wells. It's right in the middle of our area. It's a royalty interest with some surface and we had plans to drill it over the next 5 years and maybe 10 million a day total, so about half of that is ours.

Alex Heidbreder - Millennium Management

And the 3,200 is net to you?

Douglas Miller

No, no. It was actually 3,490 or something gross acres, it was a 38% mineral interest and we're going to be splitting that with BG.

Alex Heidbreder - Millennium Management

So net to you is just 1,750.

Douglas Miller

Yes. Actually net to us, it's 1,750 times 30%.

Alex Heidbreder - Millennium Management

And then the purchase price on that was the 112.5?

Douglas Miller

The what?

Alex Heidbreder - Millennium Management

The purchase price on that.

Douglas Miller

Oh, yes. All I have is a 112.5, 225 gross, which we've closed and BG probably will buy their half next week or the week after.

Alex Heidbreder - Millennium Management

It seems like an awfully high price.

Douglas Miller

Well, I guess that's debatable, isn't it? We've been working on it for 2 years. Let's put it this way, we'd buy more. Do you have any for sale?

Alex Heidbreder - Millennium Management

No, I don't unfortunately. I wish I did.

Douglas Miller

Sounds like you wouldn't sell it.

Alex Heidbreder - Millennium Management

Can you walk through the lower end of the guidance again?

Douglas Miller

That would be Paul.

Paul Rudnicki

Sure. Well first of all, the TGGT debt balance is $337 million. The lowering of the guidance, as we've mentioned, it's a couple of factors going on. It's scheduling sections at a time versus 2 well pads. We've got to wait for every single well in that section to be completed and drilled. So it's added a handful of days to our first quarter completions. We see, as Hal mentioned, the slightly lower IP in the DeSoto area with the shallow decline. And we actually think ultimately we're going to be better than where we were with the higher IPs as we're restricting the chokes. The other thing is that we're shifting some of our capital down to that area where we have the 30 million a day type of results. Those are deeper wells and take a little bit longer to drill.

Douglas Miller

Kind of cleaning up our scheduling. That's what we're doing. And it may vary. As we find changes, we'll just give everybody the data.

Alex Heidbreder - Millennium Management

Okay. And then last question is you talked -- how much more sensitive are all those wells to drill? And then what's the -- I know you cited the 2, really awesome wells, what's the average for the area?

Stephen Smith

Those wells cost about $2 million more, $2.5 million more than what we're spending in our Holly area. So somewhere in the $11 million to $12 million range.

Paul Rudnicki

The average in the area is 30 million a day.

Stephen Smith

Yes.

Alex Heidbreder - Millennium Management

That is the average?

Douglas Miller

Yes, because it's 2 wells.

Alex Heidbreder - Millennium Management

Do you guys have -- I mean, what are you guys hoping for on EURs?

Paul Rudnicki

It's still too early to tell.

Douglas Miller

We're hoping for more.

Alex Heidbreder - Millennium Management

And just last question, where are you -- has the EUR on the core DeSoto changed at all? Or is that still -- I guess what's your midpoint on the EURs for DeSoto?

Paul Rudnicki

We haven't updated our proved reserves at this point. I mean, we'll be doing that through the year as we get more data. So...

Douglas Miller

I think we're comfortable with what we had at year end. I think what we're going to find by the end of this year is we're going to have 4 or 5 different curves in DeSoto actually, depending on what area. The northwest with some faults is going to be lower than the core. And with the manufacturing, we're getting a lot more data points, so we're going to have a lot more comfort. But I don't think there's any major change there. It might be slightly higher. And then as we go south we don't have much down there, but we think the EURs could be down slightly for a month core area there too.

Operator

Your next question comes from the line of Gary Stromberg, Barclays Capital.

Gary Stromberg - Barclays Capital

Doug, your revolver is $817 million drawn pro forma. What's your comfort level there? And then I guess, part 2 is, is TGGT a long-term asset or would you look at monetizing that to help reduce some of that revolver?

Douglas Miller

Good question. We've looked again. It's such a valuable asset right now because it's allowing us to put this production on in a very timely manner, which helps our IRRs. I think to answer the TGGT question, with our forecast ramp up in production, that value should go up over the next 3 or 4 years. We look at what we can do. We've had every investment banker is coming in and showing us what we could do with MLP. We're aware of that. So there's a lot of optionality there, but I think right now keeping it and BG loves it, and we also have -- we'd like to do it a little like up in the Marcellus. And so a lot of those people -- we want to keep control, so we don't want to sell it to somebody that we -- when there's a storm, the gas doesn't get hooked up in 24 hours. I mean right now, I think controlling it is key. We look at all things, as you know. Now, to how much, what is our comfort zone on the debt? How much is it?

Paul Rudnicki

Pro forma, I mean, it's 8-something there.

Douglas Miller

$800 million. The thing -- keep in mind that the debt availability here I can expect by year end with the way we're proving up reserves. Most of these wells that we're drilling are contingent reserves, especially down in Shelby. So I have a feeling that, that revolver, unless gas goes way down, could approach $2 billion by the end of the year. So I'm comfortable at $800 million. I'm comfortable at $1 billion. And depending on what we bought, if it had cash flow, I'd be comfortable going north of that. But we will always, because of guys like you, we will always protect the box.

Operator

[Operator Instructions] There are no further questions at this time. I'll turn the call back over to Doug Miller.

Douglas Miller

Okay. Thank you. I think a lot of good questions and we had a great quarter. People are working hard. I think best thing I can say is, "No comment and stay tuned." Thank you for joining us.

Operator

This concludes today's conference call. You may now disconnect. Thank you.

Operator

Good morning. My name is Beth, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter Earnings Release and Conference Call. [Operator Instructions] Doug Miller, you may begin your conference.

Douglas Miller

Thank you very much. This is Doug Miller, Chairman of EXCO, and welcome, everybody to our first quarter earnings release and operational update. With me today, that are going to be speaking are Steve Smith, Hal Hickey and Paul Rudnicki. But I also have all the operational people, the engineers, the accountants and most importantly, our lawyer's in here. So they'll be supervising me at all expense. Before we get started, I'm going to have Ramsey read our disclaimer.

So Doug?

J. Douglas Ramsey

Thanks, Doug. I would like to remind everyone that you can go to www.excoresources.com and click on the Presentation point in the Investor Relations section at the bottom of our homepage to access today's presentation slides.

The statements that may be made on this conference call regarding our future financial operating performance, structure and results, business strategies, market prices and future commodity price risk, management activities, plans and forecasts and other statements that are not historical facts are forward-looking statements as defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Please refer to Pages 20 and 21 of the slide presentation for the complete text regarding our forward-looking statements. In addition, please refer to our website for the earnings release, which contains additional information regarding forward-looking statements and the preparation of our financial disclosures, including reconciliations and other statements regarding non-GAAP financial numbers, which will be discussed on today's call.

Doug?

Douglas Miller

Thank you. I think we announced our earnings in our operational update last night. We are going to be going over the slides here this morning, and then we'll open it up to questions. Before we get started, I want everybody to know that I have had a lot of meetings and spankings this last week, but the most important one was that the lawyers have told me that I can have no comment on anything to do with the go-private. The best they would let me say is, "No comment. Stay tuned." So that's what I'm sticking with for the whole meeting. A couple of cleanups, one of my other spankings this week was we found out that we scheduled our meeting accidentally at the same time as Pioneer did. And so we had a discussion with them. It was pure accidental. They were the first one to put it in. Our financial guys were told to do it as soon as we can. We accidentally did it. So I told them that I would announce that we did it and it was our fault and that if anybody would like to hear about an oil deal, they can shut us down and listen to Scott over there at Pioneer. We apologize to them.

Slide 3, we did what we said we were going to do. The only unfortunate thing is natural gas. Like Steve said, it's hard to put lipstick on this pig, but everybody -- everybody in here is doing what they signed up to do. I think 6 to 8 months ago, I told everybody with our plans, we were targeting exiting last year at 400 million a day. Mike and Harold did that. And each quarter, we had been targeting increasing that by 50 million a day, our exit rates. He promised me 450 million by the end of the first quarter. He did it. And now, his target for the end of the second quarter is 500 million, third quarter 550 million and exit the year at 600 million.

Now, they're doing a great job. Now, one of our challenges is forecasting our quarterly production. And of course, that's Paul's problem. We have, as we do this drilling, we'll get into it in a minute. We have shut-ins while we're doing offset fracs. That's been a challenge to schedule and we had a few tornadoes over in DeSoto Parish last week. Thank God nobody got hurt, but we had some electricity problems. I think we woke up one morning last week, Hal will get into it, we had 450 million gross shut-in because of electricity. All 22 rigs that were operating were abandoned because we had a tornado within a mile. Again, nobody was hurt. Some damage, it's been mostly repaired, almost all gas is back on. So it's hard to schedule a quarter-to-quarter with weather. But we do the best we can and basically, Paul's group has done a pretty good job with that.

Now, get into -- we have these spectacular assets and the people to go along with them. And we are a gas company. We're 95% gas. We're going to maintain that. We think we have some expertise and some assets that are second to none. So what we've done is within a year and a half, our production levels with $3 billion of debt now exceed what they were before we started our disposition.

We chose back in '08 to sell conventional assets to retire debt, which we did, put us down to 250 million a day. We started at 400 million. We were successful in the asset sales. We are now -- all of our thrust is in 2 shale plays. The main grower right now is the Haynesville, where we have 22 rigs running and we'll get into that in a minute. We've had some unbelievable success there. Again, I'll tell you that the Marcellus is something where we've had some mixed results, some real good results and it's going to be slower. But we're starting to ramp up there and Hal will get into that in a minute also.

Midstream, which is also part of the scheduling issue, has done a spectacular job keeping up. But with the weather, they have delays too. And so again, we might miss by a week or so, but they have been right on time, right on target as we completed these wells. So we have tested in to our own pipeline system 95% of the time. Right now, it's 5 feet high and rising over there, the water, so moving equipment around and getting pipelines laid is a challenge, but they're meeting the challenge.

The results in our 2 core areas have been spectacular. DeSoto is our top area. We understand it the best. Results continue to be spectacular. I think we're now into manufacturing. We'll get into that. We're actually drilling some of these sections. We're drilling 8 wells per section and having very good results, and that's been part of the timing challenge. We had initially scheduled that we were going to do it on 2-well pads. But now we're doing it on 8-well pads. And that first well, we tried to do them all at once, frac them all at once and turn them on all at once. And so the first couple of wells, as you can imagine, are now slightly behind what our initial schedule was and Paul will get into that in a minute.

Shelby area, it's a new area. As we announced last year, we made an acquisition in there jointly with BG. We have 6 rigs running down there. We've had some recent very good results. Some of the acreage we think has spectacular value. Some of the acreage we don't think has much value. We're proving that to ourselves. But we have had recently a couple of 30 million a day. Haynesville wells, deeper, more expensive. But hanging in there with ultrahigh pressures, highest we've ever seen. And we built our first Bossier well in there that came in over 25 million a day. So I would say early results we have we're very happy with them.

We've acquired some additional Marcellus acreage with a cheap deal. We did have a well in there that has made 10 million, so we're focused in 2 areas. Right now, again the problem and issues are going to be -- we're delineating where we're going to be. And one of the main things that we're doing out there is trying to schedule the pipeline and gathering system. Again, I've been saying this for 2 years, that's going to be the hold-up for us. But we're going to do it, we're going to take our time and do it right.

With that, I'm going to turn it over to Steve and go over some of our results and corporate highlights. Steve?

Stephen Smith

Thanks, Doug. Look on the Slide 5. It's just a simple chart of sort of our key metrics. All are in the plus category except cash settlements of derivatives, so we had really a strong quarter in every respect. As Doug said, our production is 490 million a day, up 55% from last year end -- I mean, first quarter last year and 17% from the fourth quarter. I just made a comparison here of the fourth quarter and the first quarter to sort of give you an idea of sort of the growth that we're experiencing.

As far as cash settlements are concerned, that's fairly simple. Some of the richer swaps had rolled over and had been replaced by more -- $5-plus kind of swaps at this point. I'll show you in just a second on the next chart where we are on that.

Operating costs we will get into in a second, also had been continuing to go down. And we're down 16% from last quarter and 35% year-over-year. So good strong quarter, where I think we're guiding toward EBITDA of around $655 million for '11 so -- and Paul will get into that.

On Slide 6, this is just a chart that will show sort of the per Mcfe metrics. And you can see, we're making headway in operating costs. Production taxes, we're doing well there, primarily because Louisiana has given us a tax break there. Gathering and transportation is hanging in. G&A is going down per Mcf. So we're very pleased with where we are. As far as the cash settlements, you can see the difference between Q4 and Q1. But we are at -- in the first quarter, we had an overall swap price of $5.90 compared to like $7-something for the fourth quarter of '10. So that'll show you a little bit of the roll off. But we're hedged for the remainder of '11 and all of '12 at more than $5 per Mcfe. So we're pleased with where we are on our hedging.

Over on Slide 7, this is the chart that Doug was alluding to showing where we were in the first quarter of '09, showing the impact of the sales, the divestitures, joint ventures, et cetera. And we're right back way above even where -- I mean somewhat above where we started in '09 and we'll be way above by the end of the year. The dark line running through all this is our total net debt, including our $750 million of bonds. We were at $1.2 billion at the end of the first quarter. That'll go slightly over the balance of the year, but our debt-to-production ratio will improve during that period of time. So hopefully, we're going to end up with a very strong growth in production this year, and it's well on our way to doing that.

Now, I'm going to turn it over to Paul and let him get into a few more of the details. Paul?

Paul Rudnicki

Thanks, Steve. I'll pick up on Slide 9 to discuss our liquidity and financial position. Steve mentioned at the end of the quarter, we ended up with $159 million of cash, $589 million drawn on our bank facility and $750 million of the senior notes for a total debt balance of $1.3 billion and net debt of just under $1.2 billion. At the end of the quarter, April 1, we re-determined our borrowing base to $1.5 billion, as highlighted here. We also reduced the interest rate under the credit facility by 50 basis points and now our spread to LIBOR is 1.5% to 2.5% based on our borrowing usage. We also extended the maturity of the facility by 2 years and again, that's reflected on the 3/31 column.

Looking at where we are on March -- on April 28, the main reason for the increase in debt is the acquisition that we made that was referenced in the press release. We made a $225 million acquisition of mineral interest, right in the middle of our development area in the Haynesville, in the core DeSoto position we have. And we're showing you the pro forma column as we expect BG to participate for their half, $112 million, $113 million here at the end of -- in the next couple of weeks.

Net-net, the end of -- on a pro forma basis, we end up with $1.3 billion of net debt and just under $1 billion of liquidity. TGGT, our midstream affiliate with BG in East Texas, closed on a $500 million credit facility during the quarter and we received $125 million distribution to repay us for the majority of the capital contributions we've made since that entity was formed. That facility, with the cash flow that TGGT is expected to have, will more than finance its growth going forward.

Going on to Slide 10, as Steve mentioned, our derivatives position. You can see we're about 50% hedged for the rest of this year at prices of $5.62 to $5.70 per Mcfe on average. Looking into 2012, we're a little bit over 30% hedged at $5.56 and we have a tiny little position out into 2013. We continue to monitor the markets and add positions. If you notice, this schedule is different than what we had at the end of the quarter. We've added hedges since the quarter for the rest of 2011. And going into 2012, prices of $4.70 to $4.85 for the rest of 2011 and $5.10 to $5.15 for 2012.

Going to Slide 11. Looking at our capital forecast for the year, we spent $246 million in the first quarter, $198 million of it was related to the drilling. We spent $25 million in leasing and $4 million -- $5 million doing seismic and our water pipelines. Our corporate capital predominantly capitalizes interest as we capitalize a portion of our unproved balance. We continue to expect the full year to be at $976 million, in line with our original budget. In the first quarter, we finished up the final bit of the East Texas/North Louisiana carry from BG and we have about $111 million remaining on the Marcellus carry. We expect to fully utilize that either late this year, probably more likely first quarter of 2012.

Looking at Slide 12 for a comparison of our first quarter guidance to our actuals, as we kind of highlight in the bullets, there's really no major line items to discuss. Production obviously exceeded the high end of our guidance. Virtually all the other operating expenses were either at the low end or below the low end of our guidance. TGGT, as I mentioned, TGGT growth coincides with the production growth in East Texas. It was above our expectations and therefore, we had a little bit higher equity income and TGGT's EBITDA, our share of their EBITDA, was again higher than our high end.

Looking at Slide 13, our guidance for the rest of this year, we continue to project total production growth in excess of 60% for this year. And as Doug mentioned, this new guidance reflects our current completion schedule and takes into account the issues we experienced here at the end of the first quarter, beginning of the second quarter. But we're well on track and as we highlighted in our press release, we're over 480 million a day today and expect to continue that growth through the quarter. And the only change that we really made to the guidance was on the production. The rest of the operating expenses were held flat from where they were before. And as Steve mentioned, we continue to see about $656 million of EBITDA based on a $4.50 price for Q3 and $4.75 price for Q4.

With that, I'll hand it over to Hal to discuss the operations.

Harold Hickey

Thanks, Paul. Slide 15, it's where our focused operations are. We've had a great quarter operationally. We had a strong environmental health and safety performance and excellent production growth. As Steve noted, we ended fourth quarter of 2010 with just less than 400 million a day of production and we averaged 350 million. In the first quarter of '11, we averaged 408 million. But currently, we're at 483 million a day. We remain pretty focused on natural gas, as Doug said, we're about 97% natural gas of our current production.

This growth is very much on target to meet our forecast of 60% or greater year-on-year growth. We're making great strides with the joint venture in our Marcellus area, our Pennsylvania and West Virginia, that joint venture is coming up on the year of activity now. I'm going to talk a little bit about what their focus is. The Permian is a small area for us, but there have been very consistent results. It's liquids-rich and our oil is up year-on-year, about 40%. So seeing good growth there on the oil side and we're seeing some excellent rates of return on our projects. We'll probably drill some 72 wells this year and expect to get 60%-plus rates of return for that drilling program.

Now, East Texas/North Louisiana remains our biggest area and our most active area in terms of production, drilling and development activity and capital. A big milestone for our operations guys is they actually surpassed 1 billion cubic feet a day of operated production most recently. That's a huge event for these guys and for our company and going from literally...

Douglas Miller

Zero in December of '08. Yes.

Harold Hickey

And growing into the way it's grown, it's really a phenomenal story. So yes, you'll see in East Texas/North Louisiana in the first quarter net production of about 355 million and current production of about 430 million. Doug referenced earlier that because of a combination of factors, weather happens some, obviously weather is always going on, but we've had some weather impacts like we had last week. But by and large, we have some ongoing shutdowns because of our fracture stimulation activity. We'll go in and we'll shut in all step wells and we averaged about 25 million a day of net shut-in to our portfolio during the first quarter because of that offset activity primarily.

Now on Slide 16, it starts to get into a little bit of detail on well activity. The first column on this page shows our operated rig count. We have 26 rigs operating at the end of the first quarter and that's where we happen to be today as well. 22 in the Haynesville/Bossier. I'll talk about how that's broken down in a minute. In addition to the 22 operated rigs that we have drilling there, currently we have 4 rigs that are drilling that are operated by others. Marcellus, we have 2 rigs in play now and Permian, 2. Like I said earlier, we spud 71 wells in the first quarter, completed 65.

We continue to have some outstanding performance relative to industry in that we keep a very low inventory of wells awaiting completion. I think last time I looked, it was 18 or 20 wells that were waiting on completion. So our guys do a good job with our frac leads and our pipeline and lining up everything so that we get our wells completed timely and get them to sale.

We continue to forecast that we'll spud nearly 300 operated wells this year and you can see the breakdown, with most of that activity being in the Haynesville/Bossier area. And currently in Haynesville/Bossier, we have 182 operated horizontal wells pull into sale. We've spud about 230. We have 107 non-operated Haynesville/Bossier wells pull into sale. We're going to maintain this 22-rig program throughout the year. And in both the Haynesville/Bossier area and the Marcellus area we have under long-term contract the fracture stimulation crews and frankly all the other services that we need to maintain our projected program under either long-term commitments or in a position where we won't have any issues waiting on service companies to get our work done. We're ramping up our Marcellus activity. We have 2 rigs running there today like I said, but by year end we'll be up to 11.

And I'll go over to Slide 17 and get down into some of the more details on the Haynesville/Bossier acreage and activity. Net to EXCO, we have about 76,000 net Haynesville acres. Of course through the JV, you can double that. We've got a significant held by production position, particularly in Holly and Waskom. And in the Shelby area, as far as HBP goes with our current drilling program, all of the acreage that's under term will be held by production by year end '11.

We're optimizing our drilling and completion methods to reduce costs in the Holly area. Our current AFEs are around $9.3 million in the Shelby area, which is our second focus area down in Nacogdoches, San Augustine and Shelby Counties. Our average costs are more in the $11.3 million range and both of those areas we're targeting taking out another $0.5 million or so of AFE cost over this year.

Doug talked about how we've initiated our manufacturing program where we're drilling typically 8 wells per section. Our average IP remains strong, 18-plus million a day in the first quarter and we're seeing that same sort of IP rate in the second quarter. Now, this is under a managed drawdown program with a restricted choke. And some of our initial data analysis is telling us that even though some of these IPs are a couple of million a day or so below our former averages, we're seeing the curves tend to flatten out. So we think our EURs may be just as strong as they have been on the past performance and the current performance.

Shelby, Doug talked about how we've had some outstanding results there as we continue to delineate and understand that acreage, and Hal made a reference a minute ago. The 2 Haynesville wells with strong, strong IPs, over 30 million a day, pressure's in the 9,300 to 10,000-plus range. And more exciting than just the IPs are the fact that the 30-day average of these things are holding up very, very well. One of them that started about 31 has averaged about 25 million a day over the 30-day period. That is strong, strong performance and we're really excited about that.

And then also up in one of our central Shelby area locations, we drilled our first Bossier well and it came in at over 25 million a day, significantly higher than what we forecast in our initial tight plan, so we're excited about the opportunity there as well.

In Holly, which is our core area in DeSoto, we've got about 23,000 acres there and we'll drill down 115 wells and we'll operate with 16 rigs. In Shelby, we've got about 24,000 net acres to EXCO. We'll drill about 48-or-so wells there in 2011, we'll operate with 6 rigs. And it's turning out to be just everything we hoped for and more. This is a great program.

Marcellus is on Page 18. We're starting to zero in on a couple of key focus areas. The Central Development Area over in west central Pennsylvania we have about 55,000 net acres. We'll drill about 18 wells there in 2011. The Northeast Development Area, which we acquired at the end of last year and BG elected to participate with us on that program in February, we have about 35,000 net acres. We'll drill about 38 wells there and that's where we've seen some of our outstanding results, where we had the 10-plus-million a day well.

In the quarter, we completed 5 wells. The IPs range from 2.1 to 10.6 million a day from varying lateral lengths between 2,250 and 4,500 feet. Now, one of those on the lower end was an appraisal well. We're continuing to drill some appraisal wells outside of these development areas. And we'll probably drill 7 or 8 appraisal wells this year and most of those will actually be in central Pennsylvania.

Today, I'll talk about our rig counts, go over to Slide 19. Midstream remains a very key part of our strategy in that it allows us to get timely well hookups and market access. Our Midstream throughput continues to set records of over 1.4 billion a day and roughly 80% of that gas is equity gas, gas that we operate and control. Our marketing guys are doing an excellent job. All of our gas has moved to market very promptly. We've used all of our firm transportation and we're using some interruptible markets very effectively as well.

TGGT, as you know, is our East Texas/North Louisiana midstream JV with BG Group. Holly, we've built a core of that program or that system or that infrastructure out and now we're focusing on well hookups and some minor expansions. The bulk of our capital issue will be focused there on our Shelby area, where we're laying out headers and facilities and continuing to formulate our takeaway plans. We'll probably spend, to the JV, $200 million to $225 million in TGGT this year.

Over in Appalachia, the Northeast Development Area where we're going to drill the 48 wells or so, is supported through a third-party infrastructure. The company that we acquired these assets from actually held onto its midstream system it had built out there, and we're working very well with them and continue to deploy our gas facility very promptly. In the Central Development Area, we actually have a few projects and we'll spend some $40 million to $50 million in our Appalachian midstream this year.

With that, I will turn the floor back over to Mr. Miller.

Douglas Miller

Okay, thanks. One of the things I wanted to mention, because I think all operators are battling this, we talked about cost and how we're focused on getting it down. But one other thing I think everybody does have is fuel costs. Most of our service providers, they have pass-through rights on diesel fuel. And diesel fuel costs have gone up, so we're getting quite a few those. So Mike and Harold are battling that. It isn't a huge number, but it seems like it has gone up quite a bit and we're seeing the effect of that. So tightened costs in the face of diesel fuel is still a challenge.

Talk a little bit about natural gas. I think the world, especially the world of New York and analysts still believe gas is going down. We have mixed on that. We have a plan if the gas does go down. And we're ready, we're hedged and we have plenty of liquidity to take advantage of that. We have recently -- I've recently some -- the short position continues to be higher than even the storage position. And so obviously, there's a lot of people rooting for it to go down. I've noticed that -- one of the things I've looked at over the last 20 years is storage, especially storage over the previous year. But I noticed about 6 months ago, because storage was actually starting to come down versus we started comparing it to the 5-year average. And here in the last week, I've seen some of these genius analysts up there, they start comparing it to the 10-year average. So we're significantly above the 10-year average and I'm confident by the third quarter when we get into the shoulder months, we'll start comparing it to the 25-year average and I bet we're above that too. But again, our rates of return on the gas side are way lower than the oil guys. I think on our oil properties, which is very small, we're seeing 60% to 100% rates of return and I'm positive if you'll turn over to Scott, you're going to hear 60% to 100% rates of return in the Sprayberry. Ours are 20% to 30%. We're very happy with it. And like my good friend, Lenard Tessler told me, a lot of the little is still a lot. With that, I'm going to open it up to questions.

Operator

Your first question comes from the line of David Heikkinen, Tudor, Pickering, Holt.

David Heikkinen - Tudor, Pickering, Holt & Co. Securities, Inc.

Thinking about your Shelby County and Shelby Trough development, you made a comment, Doug, that some areas have no value and you're testing those. What do you mean by that? Kind of have you prescribed some of the acreage that you wouldn't drill?

Douglas Miller

Yes. When we bought Common, we had data points. There was quite a bit of acreage going from north to south and we had some minimal data points. And so we thought some of it was going to be scarce as far as thickness and faulting. And we are looking at other operators drilling in that area and because of the results, we just think at today's price, they're uneconomic. They're still making wells, but they're maybe 10, 12 million a day wells. The economics don't warn us developing that. So we're staying out of that area, mostly way up to the north. And again, that has more to do with faulting and thickness, is that not right, Marcia? So we placed little or no value on it when we did it. We continue to believe that's right. Now if gas were to go up, we might change our tune a little bit. With $4 gas, there's not enough there to even call it a little rate of return. Down in Central Park, which we call jumble, [ph] we're having a lot of success. That's where we thought there was some thickness in the Bossier. We are working on that and so we're going to really try to make sure all that is held. We may even release some leases up if they're expiring up in the northern part. And one of the areas that kind of surprised us which was way deeper, was down in the southern part, at the highlander. We have drilled some wells down there. And even though we knew it was going to be more expensive, that's where we found those 30-million-a-day wells. So that was something that is a pleasant surprise. But I think the step that we thought was marginal, from the data points we had, we still believe is.

David Heikkinen - Tudor, Pickering, Holt & Co. Securities, Inc.

Okay. And then staying in East Texas, Cotton Valley horizontal. Taylor's [ph] saying potential if you had potential had some higher yields, kind of get 30 or 40 barrels per million. Are you testing anything on the Cotton Valley or no?

Douglas Miller

We're not right now. We actually had that on our budget for last year. And it's all held by production, so we just had chosen not to. We still have that opportunity out there but I'd say right now, we're 98% focused on the Haynesville area and making sure we're doing that right, making sure we know what we're doing. I mean, it is changing. But it's still there and we have seen some results. El Paso's done some, BP's done some. We're monitoring them. We have some potential there, but we think this has higher potential.

David Heikkinen - Tudor, Pickering, Holt & Co. Securities, Inc.

And then there are companies out there trying to buy or farm-in kind of providing overrides with thresholds on the private equity side. Would you monetize any of the Cotton Valley? Have you even considered that? You don't necessarily need capital, but I'm just curious.

Douglas Miller

We haven't considered it yet. We're in 50/50. We look at all possibilities and opportunities. Right now, I think a lot of the operations guys that work with Cotton Valley are also helping on the Haynesville. So it's pretty easy for us to operate. Margin is not as good because of operating cost. We look at any and all opportunities and we have been approached.

David Heikkinen - Tudor, Pickering, Holt & Co. Securities, Inc.

Okay. And then on your G&A guidance, a kind of steady uptick to the year. I'm hoping that it's not just the lawyers in the room. Are you adding people on the cash G&A side and continuing to grow your headcount?

Douglas Miller

We are -- Hal didn't tell you but I mean, keep in mind, we probably hired 150 people last year. We're growing. I notice we could hire in 5 a week. We're down to one or 2. But most of that is now coming out of Pennsylvania as we're getting ready to ramp up. But while Mike and Harold were going from 10 rigs -- 2 rigs to 10 rigs to 22, the ramp-up was in their group and I think they're basically full right now, aren't you? Now, if we decide to go to 27 rigs next year, which is on the table with BG, we'd be hiring some more people. But we're not -- it's mostly a lawyer problem. You're exactly right.

David Heikkinen - Tudor, Pickering, Holt & Co. Securities, Inc.

And then on Pennsylvania, just saw Chevron buy the other piece of Chief. Can you talk about the differences between what you all decided to buy, where you've had some pretty good rates and what was left and why you wouldn't just buy the other piece as well?

Douglas Miller

Well, it was a huge deal that had 7 different areas. And we did it jointly with BG and there was clearly 2 areas that we liked the best that we thought would fit with what we were doing that were early stage. And the whole thing -- we did not look at the whole thing because we weren't interested in the whole thing. I think that part that you just heard about today fits with our Atlas deal like a glove. And I think Chief still has a little bit more but the area where we are, we're very happy with.

Operator

Your next question comes from the line of Sachin Shah with Capstone.

Sachin Shah - ICAP

So I just wanted to get an update on where the special committee stands as far as the view of the offer and the strategic alternatives? That was my first question. Second question is, is there kind of an update on where the net asset value for the company is in the quarter?

Douglas Miller

Well, the first question, I guess you weren't on when the conference call started and -- but I did say that any questions to do with the deal I could not comment on. But the best I could do is, "No comment. Stay tuned." And I'm sticking with that one. We have not put out a net asset value. It's changing and moving and I'd say it's around $20.

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